Risk Aversion in a Dynamic Asset Allocation Experiment

@article{Brocas2019RiskAI,
  title={Risk Aversion in a Dynamic Asset Allocation Experiment},
  author={Isabelle Brocas and Juan D. Carrillo and Aleksandar Giga and Fernando Zapatero},
  journal={Journal of Financial and Quantitative Analysis},
  year={2019},
  volume={54},
  pages={2209 - 2232}
}
We conduct a controlled laboratory experiment in the spirit of Merton (1971), in which subjects dynamically choose their portfolio allocation between a risk-free and risky asset. Using the optimal allocation of an investor with hyperbolic absolute risk aversion (HARA) utility, we fit the experimental choices to characterize the risk profile of our participants. Despite substantial heterogeneity, decreasing absolute risk aversion and increasing relative risk aversion are the predominant types… 

Increasing risk aversion and life-cycle investing

We derive the optimal portfolio for an investor with increasing relative risk aversion in a complete continuous-time securities market. The IRRA assumption helps to mitigate the criticism of constant

Skewness Seeking in a Dynamic Portfolio Choice Experiment

We conduct a controlled laboratory experiment in which subjects dynamically choose to allocate their portfolio between (i) a safe asset, (ii) a risky asset and (iii) a skewed asset with negative

On Ambiguity-Seeking Behavior in Finance Models with Smooth Ambiguity

Ambiguity-seeking behavior is universally disregarded in a large theoretical finance literature with smooth ambiguity preferences. This paper questions the three rationales for this practice. First,

On Ambiguity-Lovers in Finance Models

Assuming away ambiguity-loving behavior is a predominant approach in a growing finance literature with ambiguity-sensitive investors, despite considerable evidence that a sizeable fraction of people

Fee structure and mutual fund choice: An experiment

Behavioral Aspects of Merger Decisions: The Effect of Average Purchase Price and Other Reference Prices

We develop a novel measure of target shareholders’ average purchase price (TAPP). In a sample of all U.S. public firm merger offers from 1990 to 2019, we find that: (1) the offer premium is

Behavioral Aspects of Merger Decisions: The Effect of Reference Prices on Bidders and Targets

We develop a novel measure of target shareholders’ average purchase price (TAPP). In a sample of all U.S. public firm merger offers from 1990 to 2019, we find that: (1) the offer premium is

Female CEOs’ Risk Management and Earnings Performance during the Financial Crisis

This paper examines the relationship between female CEOs’ risk management and earnings performance, considering that risk involves a corresponding proportionate return. We find that female CEOs have

References

SHOWING 1-10 OF 64 REFERENCES

Absolute and relative risk aversion: An experimental study

Kenneth Arrow posed the hypotheses that investors reveal decreasing absolute risk aversion (DARA) and increasing relative risk aversion (IRRA). It is very difficult to empirically test these two

Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework

This paper develops a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries. An important feature of these general preferences is that they

Prospect Theory, Constant Relevant Risk Aversion, and the Investment Horizon

Prospect Theory (PT) and Constant Relative Risk Aversion (CRRA) have clear-cut implications for the optimal asset allocation between stocks and the risk-free asset as a function of the investment

Measuring Risk Aversion Model-Independently

We propose a new method to elicit individuals' risk preferences. Similar to Holt and Laury (2002), we use a simple multiple price-list format. However, our method is based on a general notion of

Risk Aversion and Incentive Effects

A menu of paired lottery choices is structured so that the crossover point to the high-risk lottery can be used to infer the degree of risk aversion. With normal laboratory payoffs of several

The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test

Myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently. Two implications of myopic loss aversion are tested

An experiment on risk taking and evaluation periods

Does the period over which individuals evaluate outcomes influence their investment in risky assets? Results from this study show that the more frequently returns are evaluated, the more risk averse

Skewness Seeking in a Dynamic Portfolio Choice Experiment

We conduct a controlled laboratory experiment in which subjects dynamically choose to allocate their portfolio between (i) a safe asset, (ii) a risky asset and (iii) a skewed asset with negative

Ambiguity in Asset Markets: Theory and Experiment

This paper studies the impact of ambiguity and ambiguity aversion on equilibrium asset prices and portfolio holdings in competitive financial markets. It argues that attitudes toward ambiguity are
...